Tuesday, June 30, 2009

SF Fed President Yellen on the Economy

by Bill McBride on 6/30/2009 09:05:00 PM

San Francisco Fed President Janet Yellen has been rumored to be one of the front runners to replace Chairman Ben Bernanke (although most consider Larry Summers the front runner, assuming Bernanke isn't reappointed).

Tonight Dr. Yellen spoke in San Francisco: A View of the Economic Crisis and the Federal Reserve’s Response. Here are some excerpts on her views going forward:

I expect the recession will end sometime later this year. That would make it the longest and probably deepest downturn since the Great Depression. ...

I don’t like taking the wind out of the sails of our economic expansion, but a few cautionary points should be considered. I expect the pace of the recovery will be frustratingly slow. It’s often the case that growth in the first year after a recession is very rapid. That’s what happened as we came out of a very deep downturn in the early 1980s. Although I sincerely wish we would repeat that performance, I don’t think we will. In past deep recessions, the Fed was able to step on the accelerator by cutting the federal funds rate sharply, causing the economy to shoot ahead. This time, we already have our foot planted firmly on the floor. We can’t take the federal funds rate any lower than zero. I believe that the Fed’s novel programs are stimulating the flow of credit, but they simply aren’t as powerful levers as large rate cuts, so this time monetary policy alone can’t power a rapid recovery.

History also teaches us that it often takes a long time to recover from downturns caused by financial crises. In particular, financial institutions and markets won’t heal overnight. Our major banks have made excellent progress in establishing the capital buffers needed to continue lending even through a downturn that is more serious than we anticipate. But they are still nursing their wounds and credit will remain tight for some time to come.

I also think that a massive shift in consumer behavior is under way—one that will produce great benefits in the long run but slow our recovery in the short term. American households entered this recession stretched to the limit with mortgage and other debt. The personal saving rate fell from around 8 percent of disposable income two decades ago to almost zero. Households financed their lifestyles by drawing on increasing stock market and housing wealth, and taking on higher levels of debt. But falling house and stock prices have destroyed trillions of dollars in wealth, cutting off those ready sources of cash. What’s more, the stark realities of this recession have scared many households straight, convincing them that they need to save larger fractions of their incomes. In the long run, higher saving promises to channel resources from consumption to investment, making capital more readily available to retool industry and fix our infrastructure. But, in the here and now, such a rediscovery of thrift means fewer sales at the mall, and fewer jobs on assembly lines and store counters.

A fourth factor that could slow recovery is the unprecedented global nature of the recession. Neither we nor our trading partners can count on a boost from strong foreign demand. Finally, developments in the labor market suggest it could take several years to return to full employment. During this recession, an unusually high proportion of layoffs have been permanent as opposed to temporary, meaning workers won’t get called back when conditions improve. Also, we’ve seen an unprecedented level of involuntary part-time work, such as state workers on furlough a few days per month. Those workers are likely to return to full-time status before new workers are hired. To summarize, I expect that we will turn the growth corner sometime later this year, but I am not optimistic that the economy will spring back to normal anytime soon. What’s more, I expect the unemployment rate to remain painfully high for several more years.

That’s a dreary prediction, but there is also some risk that things could turn out worse. High on my worry list is the possibility of another shock to the still-fragile financial system. Commercial real estate is a particular danger zone. Property prices are falling and vacancy rates are rising in many parts of the country. Given the weak economy, prices could fall more rapidly and developers could face tough times rolling over their loans. Many banks are heavily exposed to commercial real estate loans. An increase in defaults could add to their financial stress, prompting them to tighten credit. The Fed and Treasury are providing loans to investors in securitized commercial mortgages, which should be a big help. But a risk remains of a severe shakeout in this sector.
emphasis added
Yellen also discusses Fed policy, the Fed balance sheet, the fiscal deficit and inflation: "I think the predominant risk is that inflation will be too low, not too high, over the next several years."

June Economic Summary in Graphs

by Bill McBride on 6/30/2009 06:23:00 PM

Here is a collection of real estate and economic graphs for data released in June ...

Note: Click on graphs for larger image in new window. For more info, click on link below graph to original post.

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New Home Sales Monthly Not Seasonally Adjusted New Home Sales in May (NSA)

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red columns for 2009. This is the lowest sales for May since the Census Bureau started tracking sales in 1963. (NSA, 32 thousand new homes were sold in May 2009; the record low was 36 thousand in May 1982).

From: New Home Sales: Record Low for May

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New Home Sales and Recessions New Home Sales in May

This graph shows shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

"Sales of new one-family houses in May 2009 were at a seasonally adjusted annual rate of 342,000 ...

This is 0.6 percent (±17.8%)* below the revised April rate of 344,000 and is 32.8 percent (±10.9%) below the May 2008 estimate of 509,000."


From: New Home Sales: Record Low for May

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New Home Months of Supply and Recessions New Home Months of Supply in May

There were 10.2 months of supply in May - significantly below the all time record of 12.4 months of supply set in January.

"The seasonally adjusted estimate of new houses for sale at the end of May was 292,000. This represents a supply of 10.2 months at the current sales rate."

From: New Home Sales: Record Low for May

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Existing Home Sales Existing Home Sales in May

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in May 2009 (4.77 million SAAR) were 2.4% higher than last month, and were 3.6% lower than May 2008 (4.95 million SAAR).

From: Existing Home Sales Graphs

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Existing Home Inventory Existing Home Inventory May

shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.80 million in May. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases in May, and then really increases over the next couple months of the year until peaking in the summer. This decrease in inventory was a little unusual, and the next few months will be key for inventory.

Also, many REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs - this is possible.

From: Existing Home Sales Graphs

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YoY Change Existing Home Inventory Existing Home Inventory May, Year-over-Year Change

This graph shows the year-over-year change in existing home inventory.

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (closer to 6 months compared to the current 9.6 months), and that will take some time.

From: Existing Home Sales Graphs

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Case-Shiller House Prices Indices Case Shiller House Prices for April

This graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 33.1% from the peak, and off 1.0% in April.

The Composite 20 index is off 32.0% from the peak, and off 0.9% in April.

From: Case-Shiller: House Prices Fall in April

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Residential NAHB Housing Market Index NAHB Builder Confidence Index in June

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) decreased to 15 in June from 16 in May. The record low was 8 set in January.

From: NAHB: Builder Confidence Decreases Slightly in June

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AIA Architecture Billing Index Architecture Billings Index for May

"A leading indicator of U.S. nonresidential construction spending held steady for a second month in May, suggesting an economic recovery has stalled, an architects' trade group said on Wednesday.

The Architecture Billings Index edged up a tenth of a point to 42.9 last month after a slight decline in the prior month, according to the American Institute of Architects....."

From: American Institute of Architects: Recovery has stalled

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Total Housing Starts and Single Family Housing Starts Housing Starts in May

Total housing starts were at 532 thousand (SAAR) in May, rebounding from the all time record low in April of 454 thousand. The previous record low was 488 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 401 thousand (SAAR) in May; above the record low in January and February (357 thousand) and above 400 thousand for the first time since last November.

From: Housing Starts May

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Construction Spending Construction Spending in April

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Residential construction spending was up slightly in April (compared to March), and nonresidential spending has peaked and will probably decline sharply over the next two years.

From: Construction Spending in April

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Employment Measures and Recessions May Employment Report

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 345,000 in May. The economy has lost almost 3.6 million jobs over the last 6 months, and over 6 million jobs during the 17 consecutive months of job losses.

The unemployment rate rose to 9.4 percent; the highest level since 1983.

Year over year employment is strongly negative (there were 5.4 million fewer Americans employed in May 2009 than in May 2008).

From: Employment Report: 345K Jobs Lost, 9.4% Unemployment Rate

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Percent Job Losses During Recessions May Employment Comparing Recessions

This graph graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP).

However job losses have really picked up over the last 8 months (4.6 million jobs lost, red line cliff diving on the graph), and the current recession is now one of the worst recessions since WWII in percentage terms - although not in terms of the unemployment rate.

From: Employment Report: 345K Jobs Lost, 9.4% Unemployment Rate

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Year-over-year change in Retail Sales May Retail Sales

This graph shows the year-over-year change in nominal and real retail sales since 1993.

The Census Bureau reported that nominal retail sales decreased 10.8% year-over-year (retail and food services decreased 10.1%), and real retail sales also declined by 10.8% on a YoY basis.

From: Retail Sales in May: Off 10.8% from May 2008

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LA Area Port Traffic LA Port Traffic in May

This graph shows the loaded inbound and outbound traffic at the port of Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic was 19.7% below May 2008.

Outbound traffic was 15.3% below May 2008.

There has been some recovery in exports over the last few months (the year-over-year comparison was off 30% from December through February). But this is the 3nd worst YoY comparison for imports - only February and April were worse. So imports from Asia appear especially weak.

From: LA Area Port Traffic in May

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U.S. Trade Deficit U.S. Imports and Exports Through April

This graph shows the monthly U.S. exports and imports in dollars through April 2009.

Both imports and exports declined again in April. On a year-over-year basis, exports are off 21% and imports are off 31%!

From: Trade Deficit Increases Slightly in April

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Capacity Utilization May Capacity Utilization

This graph shows Capacity Utilization. This series is at another record low (the series starts in 1967).

"Industrial production decreased 1.1 percent in May after having fallen a downward-revised 0.7 percent in April. The average decrease in industrial production during the first three months of the year was 1.6 percent. Manufacturing output moved down 1.0 percent in May with broad-based declines across industries. Outside of manufacturing, the output of mines dropped 2.1 percent, and the output of utilities fell 1.4 percent. At 95.8 percent of its 2002 average, overall industrial output in May was 13.4 percent below its year-earlier level. The rate of capacity utilization for total industry declined further in May to 68.3 percent, a level 12.6 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982."

From: Industrial Production Declines, Capacity Utilization at Record Low

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Vehicle Miles Driven Vehicle Miles driven in April

This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.1% Year-over-year (YoY); the decline in miles driven was worse than during the early '70s and 1979-1980 oil crisis.

Note that rolling miles driven has a built in lag, and miles driven was larger in April 2009 than April 2008.

From: DOT: U.S. Vehicles Miles increase YoY in April

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Weekly Unemployment Claims Unemployment Claims

This graph shows weekly claims and continued claims since 1971.

Continued claims decreased to 6.74 million. This is 5.0% of covered employment.

Note: continued claims peaked at 5.4% of covered employment in 1982 and 7.0% in 1975.

The four-week average of weekly unemployment claims increased this week by 500, and is now 41,500 below the peak of 10 weeks ago. There is a reasonable chance that claims have peaked for this cycle.

From: Initial Unemployment Claims Increase

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Restaurant Performance Index Restaurant Performance Index for May

"The outlook for the restaurant industry was dampened somewhat in May, as the National Restaurant Association’s comprehensive index of restaurant activity registered its first decline in five months. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 98.3 in May, down 0.3 percent from April and its 19th consecutive month below 100."

From: Restaurants: 21st Consecutive Month of Traffic Declines

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Philly Fed State Conincident Map Philly Fed State Conincident Indicators for May

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty nine states are showing declining three month activity.

This is what a widespread recession looks like based on the Philly Fed states indexes.

From: Philly Fed State Coincident Indexes

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Modifications and Re-Default

by Bill McBride on 6/30/2009 04:42:00 PM

Earlier I posted some graphs on the surge in prime delinquecies from the OCC and OTS Release Mortgage Metrics Report for First Quarter 2009

See: OCC and OTS: Prime Delinquencies Surge in Q1

Here is some info on types of modifications:

While 185,156 mortgages were modified in the first quarter of 2009, 122,398 were “combination modifications” that changed more than one term of the loan. Of the modifications made in the first quarter of 2009, 70.2 percent included a capitalization of missed payments and fees, 63.2 percent included a reduction in interest rate, and 25.1 included an extended term. By comparison, 12.6 percent of the mortgages received modifications that froze the interest rate, 1.8 percent included a reduction of principal, and 1.1 percent included a deferral of principal. All modification actions during the quarter are indicated in the table below. Since nearly two-thirds of the modifications changed more than one loan term, the sum of the percentages in the table exceeds 100 percent.

The types of actions taken have different effects on the borrower’s principal and interest payments and may, over time, have different effects on the long-term sustainability of the loan.

Of the nearly two-thirds of modifications that were combination modifications that involved two or more changes to the terms of the loan, 83.4 percent of them included capitalization of missed payments and fees, 86.1 percent included reduced interest rates, 36.3 percent included extended maturities, 12.4 percent included interest rate freezes, 2.8 percent included principal reductions, and 1.6 percent included principal deferrals.
Modification Types Click on graph for larger image.

In normal times, a capitalization of missed payments and fees is effective - because usually the homeowner fell behind for a short period because of a lost job or an emergency expense.

However, in these times with many homeowners underwater (with negative equity), capitalization isn't very effective. A reduced interest rate or longer term might be helpful.

Recidivism Rate And here are the re-default rates.

This graph shows that about 30% of modified loans re-default in the first quarter after modification and about half within the first year. This suggests modifications have not been very effective.
The percentage of loans that were 60 or more days delinquent or in the process of foreclosure rose steadily in the months subsequent to modification for all vintages where data were available. It is noteworthy that modifications implemented in the first two quarters of 2008 re-defaulted at a lower rate than those in the third quarter, measured at the same number of months after modification. Those modifications implemented in the fourth quarter of 2008 have re-defaulted at a slightly lower rate than the preceding quarter. However, it is too early to determine whether the data for the fourth quarter portend a sustained improvement in performance resulting from recent changes to modification practices.

House Prices: The Long Tail

by Bill McBride on 6/30/2009 02:14:00 PM

First a couple of quotes:

From Bloomberg: Shiller Sees ‘Improvement’ in Rate of Home-Price Drop

Home prices saw a “striking improvement in the rate of decline” in April and trading in funds launched today indicates investors believe the U.S. housing slump is nearing a bottom, said Yale University economist Robert Shiller.

“At this point, people are thinking the fall is over,” Shiller, co-founder of the home price index that bears his name, said in a Bloomberg Radio interview today. “The market is predicting the declines are over.”
...
“My guess would be that home prices are going to level off -- they’re not going to keep falling,” Shiller said in a separate interview with Bloomberg Television. Still, it’s “hard to predict” a speculative market, and “I am not optimistic that we’re going to see any sharp rebound.”
From the WSJ: Home Prices Drop at Slower Pace
Home prices in 20 major cities fell an average 0.6% in April, an improvement over the 2.2% decline the prior month, according to the Case-Shiller index produced by Standard & Poor's and released Tuesday.
...
David Blitzer, chairman of S&P's index committee, said in a statement that while "some stabilization may be appearing in some markets," the spring buying season usually helps buoy housing-market activity. "It will take some time to determine if a recovery is really here," he said.
First, the 0.6% decline in the Composite 20 index (mentioned in the WSJ) is the Not Seasonally Adjusted (NSA) index. The NSA index was at 139.97 in March, and 139.18 in April.

The Composite 20 Seasonally Adjusted (SA) index was at 141.36 in March and 140.1 in April - a decline of 0.9% or 10.2% annualized.

So house prices were falling at about a 10% annualized rate in April - and that apparently feels like "stabilization"!

By most measure like price-to-income, price-to-rent and real prices, a large portion of the probable price declines are behind us. See: House Prices: Real Prices, Price-to-Rent, and Price-to-Income Note: that post is based on the quarterly Case-Shiller National price index.

But in many previous housing busts, there was a long tail of smaller price declines (especially in real terms).

Case-Shiller Composite 10 Annualized Change Click on graph for larger image in new window.

This graph shows the annualized rate of change, monthly, for the Case-Shiller Composite 10 SA index.

Note: The Composite 20 index mentioned in the WSJ only goes back to January 2000.

Notice that during the early '90s housing bust, prices fell on and off for a few years after the worst of the price declines were over.

Case-Shiller Composite 10 Real Annualized Change The second graph shows this long tail of price declines in real terms (the composite 20 index adjusted with CPI less Shelter).

I'm not sure we've reached the "long tail" portion of this housing bust yet, but I think that prices will follow a similar pattern as previous busts, with prices falling in real terms for a few years after the worst of the price declines are over.

With record delinquencies, record foreclosures, few move-up buyers (impacting the mid-to-high end), a huge overhang of inventory, I believe prices will continue to fall in many areas.

California: 14 hours and counting to IOUs

by Bill McBride on 6/30/2009 12:34:00 PM

Form the SF Gate: No sign of budget with deadline approaching (ht shill)

Despite a deadline looming tonight, Gov. Arnold Schwarzenegger and the Legislature were at a loss Monday over how to close the state's massive deficit, and there were no signs a compromise would be reached soon.

If no plan is adopted by 12:01 a.m. Wednesday, the state plans to issue IOUs to contractors, vendors, local governments and taxpayers expecting refunds beginning Thursday. The governor plans to force 220,000 state workers to take a third unpaid day off beginning in July ...
Will retailers accept IOUs?

OCC and OTS: Prime Delinquencies Surge in Q1

by Bill McBride on 6/30/2009 11:21:00 AM

From the Office of the Comptroller of the Currency and the Office of Thrift Supervision: OCC and OTS Release Mortgage Metrics Report for First Quarter 2009

This OCC and OTS Mortgage Metrics Report for the first quarter of 2009 provides performance data on first lien residential mortgages serviced by national banks and federally regulated thrifts. The report provides a comprehensive picture of mortgage servicing activities of most of the industry’s largest mortgage servicers, covering approximately 64 percent of all mortgages outstanding in the United States and incorporating information on all types of mortgages serviced, including subprime mortgages. The report covers more than 34 million loans totaling more than $6 trillion in principal balances and provides information on their performance from the beginning of 2008 through the end of the first quarter of 2009.

Negative trends continued for mortgage data for the first quarter of 2009, but with some hopeful signs on the modification front. Continued economic pressures, including rising levels of unemployment and a continuing decline in property values, resulted in an increased number of seriously delinquent mortgages and newly initiated foreclosure actions. The first quarter data also showed a relatively greater increase in seriously delinquent prime mortgages compared with other risk categories and a higher number of foreclosures in process across all risk categories as a variety of moratoria on foreclosures expired during the first quarter of 2009.
Much of the report focuses on modifications and recidivism, but this report also shows far more seriously delinquent prime loans than subprime loans (by number, not percentage).

Seriously Delinquent Loans Click on graph for larger image.

We're all subprime now!

Note: "Approximately 14 percent of loans in the data were not accompanied by credit scores and are classified as “other.” This group includes a mix of prime, Alt-A, and subprime. In large part, the loans were result of acquisitions of loan portfolios from third parties where borrower credit scores at the origination of the loans were not available."

This report covers about two-thirds of all mortgages. There are far more prime loans than subprime loans - and the percentage of delinquent prime loans is much lower than for subprime loans. However, there are now significantly more prime loans than subprime loans seriously delinquent. And prime loans tend to be larger than subprime loans, so the losses from each prime loan will probably be higher.

Seriously Foreclosure Activity
The second graph shows foreclosure activity.

Newly initiated foreclosures picked up in Q1.

Completed foreclosures declined (because of the foreclosure moratorium), and foreclosures in process surged to 844 thousand.

Note that short sales are essentially irrelevant.

Restaurants: 21st Consecutive Month of Traffic Declines

by Bill McBride on 6/30/2009 11:00:00 AM

Note: Any reading below 100 shows contraction.

From the National Restaurant Association (NRA): Restaurant Industry Outlook Softened in May as Restaurant Performance Index Posted First Decline in Five Months

The outlook for the restaurant industry was dampened somewhat in May, as the National Restaurant Association’s comprehensive index of restaurant activity registered its first decline in five months. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 98.3 in May, down 0.3 percent from April and its 19th consecutive month below 100.

“With the performance of the current situation indicators holding relatively steady in May, the RPI’s decline was the result of restaurant operators’ dampened outlook for each of the four forward-looking indicators,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “Although restaurant operators remain relatively optimistic that economic conditions will improve in six months, their outlook for sales growth and capital spending activity softened somewhat.”
...
Restaurant operators also reported negative customer traffic levels in May, marking the 21st consecutive month of traffic declines.
...
Capital spending activity remained relatively steady, despite the continued soft sales and traffic levels. Forty-one percent of operators said they made a capital expenditure for equipment, expansion or remodeling during the last three months, down from 43 percent who reported similarly last month.
emphasis added
Restaurant Performance Index Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

This is another example of still contracting, but contracting at a slower pace than earlier this year.

Case-Shiller House Prices and Stress Test Scenarios

by Bill McBride on 6/30/2009 09:30:00 AM

Please see: Case-Shiller: Prices Fall in April for the seasonally adjusted composite indices.

NOTE: I'm now using the Seasonally Adjusted (SA) composite 10 series.

This graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

Case-Shiller Stress Test Comparison Click on graph for larger image in new window.

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index, April: 151.27

Stress Test Baseline Scenario, April: 152.90

Stress Test More Adverse Scenario, April: 146.95

So far prices are tracking between the two stress test scenarios.

Case-Shiller: House Prices Fall in April

by Bill McBride on 6/30/2009 09:00:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for April this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national index.

Case-Shiller House Prices Indices Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 33.1% from the peak, and off 1.0% in April.

The Composite 20 index is off 32.0% from the peak, and off 0.9% in April.

NOTE: Some websites are reporting the NSA results (month over month). I'm using the SA data (a better month-to-month comparison)

Prices are still falling and will probably decline for some time.

Case-Shiller House Prices Indices The second graph shows the Year over year change in both indices.

The Composite 10 is off 18.0% over the last year.

The Composite 20 is off 18.1% over the last year.

This is near the worst year-over-year price declines for the Composite indices since the housing bubble burst started.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Case-Shiller Price Declines Prices fell in 16 of the 20 Case-Shiller cities in April. In Phoenix, house prices have declined 53.7% from the peak. At the other end of the spectrum, prices in Charlotte and Dallas are off about 11% and 8% respectively from the peak. Prices have declined by double digits almost everywhere.

Denver, Dallas, Washington and Cleveland showed small price gains in April.

I'll compare house prices to the stress test scenarios soon.

States: More Little Hoovers

by Bill McBride on 6/30/2009 12:11:00 AM

From the WSJ: Ten States Race to Finish Budgets

Ten states were scrambling Monday to pass budgets before a Tuesday deadline, with a handful -- including Arizona, Indiana and Mississippi -- facing the possibility of partial shutdowns if their legislatures don't act in time.
...
Personal income-tax collections, which account for about 36% of state revenues, dropped 26% in this year's January-April period, according to data collected by the Rockefeller Institute of Government in Albany, N.Y.

Sales-tax revenues also have swooned, leaving 48 states with a combined revenue shortfall of $166 billion in the coming fiscal year, according to a report released Monday by the left-leaning Center on Budget and Policy Priorities.

...States without budgets in hand include California, Pennsylvania, North Carolina, Delaware, Illinois, Ohio and Connecticut ...
Here is a new Center on Budget and Policy Priorities report (released today) with state by state tables.

Monday, June 29, 2009

Auto Sales Expected to be near 10 Million SAAR in June

by Bill McBride on 6/29/2009 09:24:00 PM

There will be a flood of data released over the next three days, including the June employment numbers on Thursday. Other highlights include Case-Shiller house prices tomorrow and auto sales on Wednesday.

Several analysts expect an increase in auto sales in June, compared to May, on a seasonally adjusted annual rate (SAAR) basis. From the WSJ: Car-Sales Rebound Seen for June

[A]nnualized U.S. sales could hit 10 million this month for the first time in 2009, Ford Motor Co. analyst George Pipas said on Monday. The deep discounts that General Motors Corp. and Chrysler Group LLC have offered to boost sales are also likely to bolster June sales.
...
A GM spokesman also said an annualized 10 million sales rate is possible for June.

J.D. Power and Associates predicts annualized June sales of 10.3 million new cars and trucks, up from 9.9 million in May, while Edmunds.com expects the sales rate to top 10 million, though overall sales will still be 25% lower than a year ago.
But before everyone gets all Green Shootie ...

Vehicle Sales This graph shows light vehicle sales since the BEA started keeping data in 1967.

Breaking 10 million (SAAR) in June might put sales 10% off the bottom in February, but is is still more than 25% off from June 2008 (13.7 million light vehicle SAAR) and still near the bottom of the cliff.

Guaranty Financial: Last Hope is FDIC

by Bill McBride on 6/29/2009 06:39:00 PM

In a 8-K regulatory filing today, Guaranty Financial stated the only "only remaining means by which the Company might possibly raise sufficient capital" is with the help of the FDIC. The Company expects current shareholders to be wiped out.

According to the Houston Business Journal (ht Tim), Guaranty has $14.4 billion in assets, and would be the largest bank to fail this year.

From the SEC filing:

Based on the current status of discussions involving its principal stockholders, other sources of financing, and certain regulatory authorities, the Board of Directors and management of the Company believe that the only remaining means by which the Company might possibly raise sufficient capital for it and its wholly-owned subsidiary, Guaranty Bank (the “Bank”), to comply with the Orders to Cease and Desist issued by the Office of Thrift Supervision (“OTS”) described in the Company’s Current Report on Form 8-K filed on April 8, 2009, is through a plan for open bank assistance (“Open Assistance”). The Open Assistance plan, which the Company is discussing with the Federal Deposit Insurance Corporation (“FDIC”) and the OTS, would involve a significant equity capital infusion from private investors, including the Company’s current principal stockholders, and an agreement under which the FDIC would absorb a portion of any losses associated with a pool of certain of the Company’s assets.

An Open Assistance plan must be approved by the FDIC. Before the FDIC can provide Open Assistance to the Bank, it must establish that the assistance is the least costly to the deposit insurance fund of all possible methods for resolving the financial condition of the Bank. The FDIC may deviate from the least cost requirement only in limited circumstances to avoid “serious adverse effects on economic conditions or financial stability” or “systemic risk” to the banking system. An additional condition to Open Assistance is that the OTS and FDIC must also determine that the Bank’s management is competent, has complied with all applicable laws, rules, and supervisory directives and orders, and has not engaged in any insider dealings, speculative practices, or other abusive activity. The FDIC may not approve an Open Assistance plan if it would benefit any stockholder or affiliate of the Company. As a result, the Company expects that the implementation of any Open Assistance plan would essentially eliminate the value of any of the Company’s currently outstanding equity interests, including shares of the Company’s common stock.

Open Assistance has historically been used extremely rarely by the FDIC, and there is no assurance that it would be available to the Company or the Bank in this case. In addition, while the Company has received expressions of interest from private investors with respect to the necessary capital infusion from private investors, it has not received capital commitments from any of these investors. Accordingly, the Company has not yet formally submitted to the FDIC its plan for Open Assistance, and it may ultimately not be able to do so. If a plan is formally submitted, the FDIC may choose not to approve it.

If the FDIC does not approve a plan for Open Assistance, the Company will no longer have the intent and ability to hold its mortgage-backed securities portfolio to recovery of unrealized losses, and, consequently, there would be substantial doubt that the Company would be able to continue as a going concern. In such case, the Company would be required to take material charges relating to the impairment of assets, in which case the preliminary financial information provided by the Company in previous Forms 12b-25 for the periods ended December 31, 2008 and March 31, 2009 should not be relied upon.

More on the Fifty Herbert Hoovers

by Bill McBride on 6/29/2009 06:22:00 PM

From the Boston Globe: Patrick signs state budget (ht energyecon)

Governor Deval Patrick today signed a budget for next year that cuts aid to cities and towns, pares back programs throughout state government, and imposes $1 billion in additional taxes on Massachusetts residents, shoppers, and visitors.
...
“This is without question an austere – and in some respects, painful – budget,” Patrick told reporters. “It contains many unavoidable spending cuts, and many of them will have a painful impact.”

He said the budget “reflects the stark economic realities of the time.”
Higher taxes and less spending at the state level - what Krugman called the Fifty Herbert Hoovers

Meanwhile - no progress in California on a budget.

FirstFed and Option ARMs "Last One Standing"

by Bill McBride on 6/29/2009 03:11:00 PM

Here is an interesting article on FirstFed in the Los Angeles Business Journal: Last One Standing (ht Will)

Since souring option ARMs have taken down a number of big lenders, the big question looms: Will FirstFed, a savings and loan founded in Santa Monica on the eve of the Great Depression, be next?
...
In January, regulators placed the thrift under a cease-and-desist order over concerns that its capital supply was rapidly depleting. Even its auditor expressed doubt about its ability to survive.

Yet the institution is still around ...
Basically FirstFed is the last of the Option ARM lenders (Wachovia, Countrywide, WaMu, IndyMac are all gone). And on their business:
FirstFed had been making option ARM loans without incident for more than 20 years. The loans held up well largely because option ARMs tended to be given to borrowers with good credit and proof of income.
...
[By 2005 a] growing number of borrowers began opting for the minimum monthly payment, which sometimes did not even cover the interest rate. ...

[CR Note: by 2005, Option ARMs were being used for "affordability" instead of for cash management]

FirstFed readily admits it made the mistake of dropping its own standards in a misguided attempt to remain competitive. It did that mostly in 2005, a year in which the thrift originated $4.4 billion in single-family loans – primarily option ARMs and most without full verification of income or assets.

But the thrift was also one of the first to pull back. By late 2005 and into 2006, managers made the decision to stop underwriting the riskiest loans and begin requiring proof of income. Within two weeks, their business dropped in half.

[CR Note: Notice the risk layering. Not only were these Option ARMs, they were stated income (liar loan) Option ARMs and even no asset verification!]
...
In late 2007, with a $4.4 billion portfolio of option ARM loans set to recast, FirstFed began working aggressively to modify its at-risk loans.
...
In the past year and a half, FirstFed has modified some 2,000 loans, which constitute $2.8 billion of its option ARM portfolio ... a new effort currently under way could modify all but $400 million of the remaining loans.
The average loan balance seems very high. From the Q1 10-Q SEC filing:
At March 31, 2009, 1,511 loans with principal balances totaling $718.5 million had been modified.
That is an average loan balance of $475 thousand and far short of the $2.8 in loan mods the article mentions - although FirstFed has probably modified a number of loans in Q2.

FirstFed is a candidate for BFF (or Thursday this week).

A comment on Fed Chairman Ben Bernanke

by Bill McBride on 6/29/2009 01:27:00 PM

Given all the recent attacks, I'd be remiss if I didn't write something about Bernanke, but first ...

I've been a regular critic of Ben Bernanke. I thought he missed the housing and credit bubble when he was a member of the Fed Board of Governors from 2002 to 2005. And I frequently ridiculed his comments when he was Chairman of the President Bush's Council of Economic Advisers from June 2005 to January 2006.

In 2005, I posted these comments from Bernanke and disagreed strongly:

"While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom," ...

Those fundamentals, Bernanke said, include low mortgage rates, rising employment and incomes, a growing population and a limited supply of homes or land in some areas.

"For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,"
And after Bernanke wrote a commentary in the WSJ: The Goldilocks Economy, I called it "bunkum" and I argued Bernanke was channeling Calvin Coolidge:
The entire commentary is bunkum. But instead of correcting each of Bernanke's false assertions, I've found the template for his talking points:
No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity and contentment, harmonious relations between management and wage earner, freedom from industrial strife, and the highest record of years of prosperity.
Calvin Coolidge, State of the Union Address, December 4, 1928
Bernanke is now channeling Coolidge's monument to economic shortsightedness.
And I disagreed again in July 2005 when Bernanke said:
Top White House economic adviser Ben Bernanke said on Friday strong U.S. housing prices reflect a healthy economy and he doubts there will be a national decline in prices.

"House prices have gone up a lot," Bernanke said in an interview on CNBC television. "It seems pretty clear, though, that there are a lot of strong fundamentals underlying that.

"The economy is strong. Jobs have been strong, incomes have been strong, mortgage rates have been very low," the chairman of the White House Council of Economic Advisers said.

The pace of housing prices may slow at some point, Bernanke said, but they are unlikely to drop on a national basis.

"We've never had a decline in housing prices on a nationwide basis," he said, "What I think is more likely is that house prices will slow, maybe stabilize ... I don't think it's going to drive the economy too far from its full-employment path, though."
And we can't forget Bernanke's "contained" to subprime comments in March 2007?
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
That became a running joke.

With that lengthy prelude, I've felt once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed's role to provide appropriate liquidity (we can disagree on what is appropriate). I don't think it is the Fed's role to run an insurance company - but I think that is as much the failure of Paulson's Treasury as overreach by the Fed.

And given all the recent attacks on Bernanke - many of them very personal - I'd like to reprint some of Jim Hamilton's comments: On grilling the Fed Chair
It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.
I agree with Professor Hamilton.

Fed's Rosengren on Macroprudential Oversight

by Bill McBride on 6/29/2009 12:28:00 PM

Boston Fed President Eric Rosengren spoke this morning on The Roles and Responsibilities of a Systemic Regulator

One of my complaints five years ago was that lending standards were too lax (or non-existent), leverage was increasing rapidly, and lenders were clearly making loans that would probably not be repaid.

Rosengren addresses this issue:

Frequently, examiners spend significant time analyzing the adequacy of reserves, given asset quality. Reserve levels are calculated based on accounting standards that focus on incurred losses at the bank, rather than expected or unexpected losses. The incurred-loss model can sometimes be at odds with a more risk-based view that is more forward looking. By focusing on reserves in the manner defined by accounting rules, examiners are looking at history rather than focusing on whether banks have adequately provided for future losses. During periods when asset prices are rising rapidly and when nonperforming loans tend to be low, this construct can result in lower estimates for incurred losses and thus lower reserves – while at the same time, earnings and capital will likely be growing.

Periods when earnings are strong and nonperforming loans are low are likely the times that a macroprudential supervisor would need to be particularly vigilant. Rising asset prices are often accompanied by increases in leverage, as financial institutions provide financing for sectors of the economy that are growing rapidly. This growth frequently occurs with lessened attention to underwriting standards, a greater willingness to finance long-run positions with short-term liabilities, and a greater concentration of loans in areas that have grown rapidly. So – unlike the focus on incurred losses and accounting reserves of traditional safety and soundness supervision – a systemic regulator would need to be focused on forward-looking estimates of potential losses that could cause contagious failures of financial institutions.
bold emphasis added
UPDATE: Lama notes that Rosengren is incorrect about accounting just looking at "history", and reminds me of the guest piece he wrote in 2008: The Pig and The Balance Sheet

And Rosengren concludes:
A systemic regulator or macroprudential supervisor would need not only the ability to monitor systemically important institutions, but also the ability to change behavior if firms are financing a boom by increasing leverage and liquidity risk. It follows that legislation that aims to design an effective systemic regulator needs to provide the regulator with the authority to make such changes. Understanding the activities of systemically important firms would require a clear picture of their leverage, their liquidity, and their risk management. Furthermore, to be truly effective in “leaning against the wind,” such a regulator would need the ability to prevent the build-up of excessive leverage or liquidity risk.
However Rosengren doesn't address how the macroprudential supervisor would identify excessive leverage or liquidity risk. During every bubble there are always people in position of authority arguing everything is fine. As an example, here is what then Treasury Secretary Snow said on June 28, 2005 (has it really been 4 years?):
Snow tried to alleviate concerns that climbing nationwide housing prices could ultimately lead to an asset bubble that will burst at some point.

"I think in some markets housing prices have risen out of alignment with underlying earnings," Snow said. But also answering the question whether there was a housing bubble in the United States his answer was a flat-out "no."
He was flat-out wrong. And that was almost at the peak of the bubble (in activity).

I think we need to clearly understand how we identify - in real time - these macroeconomic and systemic risks.

Romer: Big Stimulus Impact Starts Now

by Bill McBride on 6/29/2009 10:20:00 AM

From the Financial Times: Romer upbeat on US economy

Ms Romer, chairman of the US president’s council of economic advisers, told the Financial Times in an interview she was “more optimistic” that the economy was close to stabilisation.
...
Ms Romer said stimulus spending was “going to ramp up strongly through the summer and the fall”.

“We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards,” she said.

Ms Romer said that stimulus money was being disbursed at almost exactly the rate forecast by the Office of Management and Budget. “It should make a material contribution to growth in the third quarter.”

But she acknowledged that cutbacks by states facing budget crises would push in the opposite direction.

Ms Romer said the latest economic data were encouraging, following a weaker patch a month ago. “I am more optimistic that we are getting close to the bottom,” she said.
...
But she added: “I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario but it is not as unlikely as many people think.

“We are going to get some serious oomph from the stimulus, there is the inventory cycle and I believe there is some pent-up demand by consumers.”
I think a normal V-shaped recovery is very unlikely since the two usual drivers of economic recovery - residential investment and personal consumption expenditure - will both be crippled for some time.

Freddie Mac June Investor Presentation

by Bill McBride on 6/29/2009 08:48:00 AM

Here are a few graphs from the Freddie Mac June Investor Presentation.

Freddie Mac LTV Click on graph for large image.

The first graph shows the average LTV of the Freddie Portfolio (graph doesn't start at zero).

The second graph shows the current breakdown by LTV and credit score.

According to Freddie Mac's estimate, 17% of the mortgages in their portfolio have negative equity.

Freddie Mac LTV Another 11% of the loans have less than 10% equity.

According to the Census Bureau, 51.6 million U.S. owner occupied homes had mortgages (end of 2007, see data here)

This would suggest that 8.8 million households have negative equity (51.6 million times 17%), and another 5.7 have 10% or less equity. However, the loans from Freddie Mac were better than most, and this is probably the lower bound for homeowners with negative equity.

Freddie Mac LTV The third graphs show how the LTV breakdown has shifted over time as house prices have fallen.

I'm surprised that any loans had negative equity in 2004, but just over 10% of the portfolio appeared to have LTV portfolio risk in 2004. Falling house prices has changed the mix!

Note: I'd consider the Zillow estimate of 20.4 million homeowners with negative equity as the upper bound (and I think their estimate is too high).

About 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.
There is much more in the Freddie Mac presentation.

Sunday, June 28, 2009

BIS: Toxic Assets Still a Threat

by Bill McBride on 6/28/2009 09:52:00 PM

The Bank of International Settlements (BIS) will release their annual report tomorrow. The Guardian has a preview: Recovery threatened by toxic assets still hidden in key banks

... Despite months of co-ordinated action around the globe to stabilise the banking system, hidden perils still lurk in the world's financial institutions according to the Basle-based Bank of International Settlements.

"Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks," the BIS says in its annual report. "At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses."

... As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS's assessment will carry weight with governments. It says: "The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy."

It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. "Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage," it says.
Also, the WSJ has an article on the incredibly shrinking PPIP: Wary Banks Hobble Toxic-Asset Plan

I think the stress tests showed that the U.S. should have pre-privatized BofA, Citigroup and GMAC. Oh well ...

How many Homeowners Sold to Rent at the Peak?

by Bill McBride on 6/28/2009 07:26:00 PM

TJ & The Bear asks: "ocrenter had an interesting question over at JtR's BubbleInfo. Specifically, what percentage of homeowners that sold during the height of the bubble (04 to 06) went to cash and rented?" ocrenter is obviously curious about "cash on the housing sidelines".

We don't have the data to answer that question, but using the Census Bureau Residential Vacancies and Homeownership report, we can see that the number of occupied rental units bottomed in Q2 2004.

Rental Units Click on graph for larger image in new window.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

The number of occupied rental units bottomed in Q2 2004, and has increased by 3.8 millions units since then.

The homeownership rate also peaked in 2004, although it didn't start declining sharply until 2007.

Homeownership Rate Note: graph starts at 60% to better show the change.

There are probably several reasons why the number of renters started increasing in the 2nd half of 2004 (even though the housing bubble didn't peak in activity until the summer of 2005, and in prices until the summer of 2006.) More and more renters probably thought housing prices were too high by 2004 and put off buying, and some homeowners probably sold and became renters ...

To answer ocrenters question (somewhat), the number of renters increased by about 1.6million in the 2004 to 2006 period. A large number of those renters could have been homeowners who decided to sell and rent. We just don't have the data ...

The Revenge of the Renters

by Bill McBride on 6/28/2009 02:34:00 PM

Dilbert.com

ht ShortCourage

Scientific American: Bubbles and Busts

by Bill McBride on 6/28/2009 02:03:00 PM

Scientific American has a discussion of behavioral economics (Shiller's area) in the July issue. Here is a funny quote:

“Economists suffer from a deep psychological disorder that I call ‘physics envy'. We wish that 99 percent of economic behavior could be captured by three simple laws of nature. In fact, economists have 99 laws that capture 3 percent of behavior. Economics is a uniquely human endeavor ..."
Andrew Lo, a professor of finance at the Massachusetts Institute of Technology
It probably isn't as dismal as Lo suggests!

Here is the article from Scientific American: The Science of Economic Bubbles and Busts (ht Jonathan) and a short excerpt:
... [T]he ideas of behavioral economists, who study the role of psychology in making economic decisions, are gaining increasing attention today, as scientists of many stripes struggle to understand why the world economy fell so hard and fast. And their ideas are bolstered by the brain scientists who make inside-the-skull snapshots of the [ventromedial prefrontal cortex] VMPFC and other brain areas. Notably, an experiment reported in March ... demonstrated that some of the brain’s decision-making circuitry showed signs of money illusion on images from a brain scanner. A part of the VMPFC lit up in subjects who encountered a larger amount of money, even if the relative buying power of that sum had not changed, because prices had increased as well.

The illumination of a spot behind the forehead responsible for a misconception about money marks just one example of the increasing sophistication of a line of research that has already revealed brain centers involved with the more primal investor motivations of fear and greed ... A high-tech fusing of neuroimaging with behavioral psychology and economics has begun to provide clues to how individuals, and, aggregated on a larger scale, whole economies may run off track. Together these disciplines attempt to discover why an economic system, built with nominal safeguards against collapse, can experience near-catastrophic breakdowns.
...
The behavioral economists who are trying to pinpoint the psychological factors that lead to bubbles and severe market disequilibrium are the intellectual heirs of psychologists Amos Tversky and Daniel Kahneman, who began studies in the 1970s that challenged the notion of financial actors as rational robots. Kahneman won the Nobel Prize in Economics in 2002 for this work; Tversky would have assuredly won as well if he were still alive. Their pioneering work addressed money illusion and other psychological foibles, such as our tendency to feel sadder about losing, say, $1,000 than feeling happy about gaining that same amount.

A unifying theme of behavioral economics is the often irrational psychological impulses that underlie financial bubbles and the severe downturns that follow. Shiller, a leader in the field, cites “animal spirits”—a phrase originally used by economist John Maynard Keynes—as an explanation. The business cycle, the normal ebbs and peaks of economic activity, depends on a basic sense of trust for both business and consumers to engage one another every day in routine economic dealings. The basis for trust, however, is not always built on rational assessments. Animal spirits—the gut feeling that, yes, this is the time to buy a house or that sleeper stock—drive people to overconfidence and rash decision making during a boom. These feelings can quickly transmute into panic as anxiety rises and the market heads in the other direction. Emotion-driven decision making complements cognitive biases—money illusion’s failure to account for inflation, for instance—that lead to poor investment logic.
I've argued before that many buyers during the late stages of the bubble acted rationally. They could buy with little or no money down, and their house payments were below the comparable rent for a couple of years . If prices went up, they could sell as a profit - and if prices went down, they could strategically default. That was a systemic problem.

But animal spirits definitely helps explain the rush to buy that we saw at the peak of the bubble.

As an aside, I highlighted the one sentence because I've seen that behavior frequently. Some people are so afraid of losing money on each investment that they pass up on some very good investments. These individuals appear to assign a higher value to losing $1000, than gaining the same amount.

Boom Time: Personal Bankruptcies in SoCal

by Bill McBride on 6/28/2009 10:29:00 AM

From the LA Times: Personal bankruptcies surge in Southern California

Going legally broke has made a big comeback -- especially in the Los Angeles area -- despite a mid-decade revision to the U.S. Bankruptcy Code intended to curb filings.

The number of Southern Californians seeking bankruptcy protection nearly doubled in 2008 from 2007 in the U.S. Bankruptcy Court's seven-county California Central District, by far the biggest increase in the nation.

Bankruptcy is still booming. Personal filings from January through April, the most recent month available, rose 75% in the Central District compared with the year-earlier period.

Bankruptcy experts attribute the growth mainly to the mortgage meltdown, which hit the region's adventuresome borrowers particularly hard.
Ahhh ... "adventuresome borrowers" ... sounds better than gamblers or speculators.

Cartoon Eric G. Lewis

Click on cartoon for larger image in new window.

Repeat: Cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

Foreclosure Auction Bidding Wars

by Bill McBride on 6/28/2009 01:31:00 AM

First from Matt Padilla: Frenzied bidding on discounted foreclosures

Whenever I attended auctions in 2007 and 2008, investors generally passed on properties. But on June 26 they jumped on houses and condos with discounts of greater than $100,000 on the debt and fees owed on each property.

For example, at least four people bid on a two-bedroom house in Anaheim on Zeyn Street. Winning bid: $206,000. Amount owed before foreclosure: $565,000. Discount: $359,000. ...

The discount is what the bank is willing to accept; it’s not directly related to the current market value, though I am sure the bank has a ballpark value in mind when it decides how much to accept.
...
A few other examples:
•Another property in Anaheim, a condominium on South Walnut, sold for $154,000, 57% off the debt owed of $358,000. At least three investors bid on it.
...
•A property on West Sunflower in Santa Ana went for $110,500, close to a third of $319,663 owed. ...
Normally lenders just bid what they are owed at auction, but I've been hearing for several months about some lenders bidding substantial under the amount owed. Jillayne discussed this a couple of months ago for an auction in Bellevue, WA.

On a slightly different topic - many REOs are receiving multiple bids (because some lenders are trying to price them to start bidding wars). Here is a video from Jim the Realtor (after the ice cream truck bit) of an REO with 18 offers:

Saturday, June 27, 2009

Freddie Mac Delinquencies and Unemployment Rate

by Bill McBride on 6/27/2009 09:37:00 PM

Yesterday I posted a graph of the Freddie Mac delinquency rate by month since 2005. I was asked if I could add the unemployment rate ... so by request ...

Freddie Mac Delinquency Rate and Unemployment RateClick on graph for large image.

This graph shows the Freddie Mac single family delinquency rate and the unemployment rate since 2005.

Note that the unemployment rate y-axis starts at 4% to match up the curves.

Here is the Freddie Mac portfolio data.

There are many reasons for the rising delinquency rate. Earlier today we discussed some new research suggesting a number of homeowners with negative equity are walking away from their homes ("ruthless default"). There are also negative events that can lead to delinquencies - like death, disease, and divorce - but one of the main drivers is probably loss of income.

New GM Agrees to Assume Future Product Liability Claims

by Bill McBride on 6/27/2009 07:58:00 PM

From the WSJ: GM to Take on Future Product-Liability Claims (ht sportsfan, Basel Too)

General Motors Corp ... has agreed to assume legal responsibility for injuries drivers suffer from vehicle defects after the auto maker emerges from bankruptcy protection.
...
Under GM's original bankruptcy plan, the auto maker planned to leave such liabilities behind after selling its "good" assets to a "New GM" owned by the government. That meant future GM car-accident victims who believed faulty manufacturing caused their injuries would be unable to sue the New GM. Instead, they would have been treated as unsecured creditors, fighting over the remains of GM's old bankruptcy estate.

GM's move to take responsibility for future product-liability claims, outlined in a court filing late Friday evening, represents a partial victory for more than a dozen state attorneys general and several consumer advocacy groups.
...
Car-accident victims with pending lawsuits and those who had won damages against GM before it filed for bankruptcy would still be unable to bring claims against the new GM. They would remain with other unsecured creditors making claims against the "old GM." As GM's old estate winds down, those victims are likely to recover little or nothing.
This agreement doesn't cover current product liability plaintiffs - this just appears to cover future car-accident victims.